Alkyl Amines Research Report By HDFC Sec

Hold on tight

Despite an underwhelming Q4FY19 performance, we urge investors to keep their faith intact in AACL owing to the (1) Impending gain in market share in the Methyl Amines space, (2) Expanding margins as the share of derivatives in the total product mix increases. Maintain BUY.

.@EquirusGroup's @virajmehta16: Despite operating in a niche #business, #AlkylAmines has created a strong moat https://t.co/r6hBEexjak #investing #stockstowatch pic.twitter.com/n4RV7CQgJr

— Outlook Business (@OutlookBusiness) May 9, 2019

HIGHLIGHTS OF THE QUARTER

Alkyl Amines (AACL) reported Q4 Sales/EBITDA/PAT of Rs 2.38bn/384mn/176mn respectively. Of the total sales growth of 36.4%, ~66% was attributable to jump in volumes. Gross margins cracked by 528bps QoQ to 40.3% consequential to high methanol, ethanol and ammonia prices. Increase in utilization triggered operative leverage (oplev) that resulted in mere 198bps QoQ fall in the EBITDA margins. Though a bounce back from these Q4 levels in ensuing quarters is likely with stability in RM prices and ability to pass on these cost fluctuations with a lag.

#4QWithCNBCTV18 | Alkyl Amines Q4 EBITDA margin contracts 700 basis points on a like-to-like basis pic.twitter.com/4LaxQgeD6m

— CNBC-TV18 (@CNBCTV18Live) May 21, 2019

On one hand where AACL’s competitors who are either running at chock-a-block Methyl Amines capacity or have shut their facilities, Alkyl with (1) 30% idle capacity at Dahej, (2) Debottlenecking of 15kTPA by FY21, will burgeon market share on the back of robust demand from the pharma industry.

AACL plans to spend Rs 2.5bn to expand its Methyl Amines capcity, N-Ethyl-2-Pyrrolidone (NEP) and N-Methyl Pyrrolidone (NMP) and a derivatives plant over FY20/21 at their Dahej and Kurkumbh facility. Of this, ~Rs 1bn will be expensed largely on expanding Methyl Amines capacity by ~7.5kTPA, product derivatives, development of utility facilities and effluent treatment plant in FY20. The rest ~7.5kTPA capacity will be added in FY21.

The product mix is likely to remain polarised towards the low margin amines, which will keep EBITDA margins muted in FY20E (18.6% from 19.4% in FY19). FY21 will witness a bump-up in margins to ~21% as (1) The share of derivatives increase in the mix, (2) Higher utilization prompts oplev.

Near term outlook: Ramp-up in utilization of the Methyl Amines facility at Dahej.

STANCE

Strong return ratios (RoIC to improve from 18.9% in FY19 to 19.8% in FY21E), gain in market share in Methyl Amines and its derivatives and a prudent management make AACL an attractive bet at current valuations (trading at 13.4 FY21E EPS). We are valuing AACL at 22x Mar’21E EPS and maintain a BUY rating with a TP of Rs 1,313.